Starting a new registered investment advisor (RIA) firm can be a smart career move. A successful investment professional can go from an employee receiving a pittance based on their productivity to a main shareholder reaping the rewards of successful investment strategies.
Those who start new RIA firms have total control over client relationships and the compensation offered to investment professionals. They can choose what clients to work with and what investment strategies to utilize on their behalf.
Of course, starting a new business comes with a variety of risks. Professionals often need to go over their existing contracts carefully to ensure they aren’t at risk of a lawsuit. They may also need to plan very thoroughly to mitigate the liability that comes from operating a small business. Proper licensing and also business insurance can be very important for those starting new RIA firms. What types of insurance may be valuable for those starting their own investment firms?
Errors and omissions insurance
Professional liability insurance is crucial for anyone providing high-value services to clients. An investment professional could make a simple mistake that could cost their clients tens of thousands of dollars or more. Those clients might then take legal action against the RIA firm or the specific investment professional who managed their funds. Errors and omissions insurance, sometimes referred to as professional liability coverage, helps offset the risk of clients suing over professional failures that lead to financial losses.
Premises liability coverage
An investment firm typically does not have the kind of foot traffic that a retail establishment does. However, clients may occasionally come to the facility in person to transfer funds or discuss an investment strategy. There are also vendors and others who may visit the property and could end up injured as a result. Premises liability insurance is a crucial form of protection for any organization with its own offices and face-to-face meetings.
Business interruption insurance
An RIA firm likely has many ongoing financial obligations. It may pay a premium rate for rent in an upscale facility. The employees assisting clients at the firm likely have competitive salaries and complex benefits packages. A temporary issue that forces the company to cease operating could lead to those costs accruing at the same time that the company has no revenue to cover those expenses. Business interruption insurance can help cover the basic expenses of operating an organization when the company must cease operations temporarily due to factors outside of the company’s control.
There are other forms of insurance that are likely necessary, including workers’ compensation and unemployment coverage for workers. Insurance is one of several key investments that can limit an organization’s exposure when forming a new breakaway RIA organization. Securing the right coverage is an important part of the business startup process and can help an investment professional feel more confident about their exposure.